Accounting Principles and Procedures Flashcards
What are accounts and why do we have them?
To keep track of money coming and money going out so they know they can pay their bills and suppliers.
- So they can monitor profit and loss and company performance.
- Use the information for future business planning
- So they can submit annual financial statements to Companies House
What is meant by the terms Gross and Net?
It is a financial term where gross means the total amount before anything is deducted and net means the amount after deductions
What is the difference between statutory i.e. submitted accounts and management accounts?
Statutory account has to be filed/ submitted by law and has to meet a certain criteria whereas management accounts just for the purposes of running and managing the business usually internal use, but sometimes the banks use them to.
Why is it important to carry out budget management?
To ensure your firms has sufficient draw down funds to meet its current and future business objectives
What would you typically include in a PLC account?
• Chairman’s statement
• Independent auditors report
• Income statement(profit and loss account)
• Statement of financial position (balance sheet)
• Corporate governance report
• Remuneration report
What statutory accounting reports re limited companies required to produce annually?
Full balance sheet income statement: P&L Turnover Auditors report Directors report
What is GAPP?
Generally accepted accounting principles (GAAP) refer to a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. Normally used by smaller companies
What are IFRS?
International financial reporting standard IFRS
The largest difference between the US GAAP (Generally Accepted Accounting Principles) and IFRS is that IFRS is principle-based while GAAP is rule-based. Rule-based frameworks are more rigid and allow less room for interpretation, while a principle-based framework allows for more flexibility.
What is GAPP?
Generally accepted accounting principles (GAAP) refer to a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. Normally used by smaller companies
What are IAS?
International Accounting Standards
What is a balance sheet?
Balance sheet - A balance sheet is a financial statement that reports the businesses financial position at one point in time showing company’s assets, liabilities and shareholders’ equity at a given date.
What is a cash flow statement?
Cash flow shows the actual receipts and expenditure and includes VAT.
- Reviewing cash flow can identify potential shortfalls in cash balance i.e. where you may not have enough cash in the business to pay suppliers etc.
- Review cash flow helps ensure businesses can afford to pay suppliers and employees i.e. the cash coming in is enough to cover the cash going out.
What is a profit and loss account?
A summary of a business’s income and expenditure transactions usually prepared on an annual basis.
P&L Accounts demonstrate how the revenue is transformed into the net income - how the actual income the business receives transfers into profit for the year.
These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs, or both.
Explain the differences between a Profit and Loss statement and a Balance Sheet?
P&L show companies position at a moment in time, balance sheet is a statement of revenue and costs incurred over a specific period of time usually a year.
How would you use a profit and loss statement?
Good decision making/ business planning
See if your business is successful and how it has grown over s period
Identifies if you are making or losing money
At what point do you need to start paying VAT?
Income threshold of £85k
How do cash flows differ from the P&L?
The key difference between cash flow and profit is that while profit indicates the amount of money left over after all expenses have been paid, cash flow indicates the net flow of cash into and out of a business.
Under IFRS 16, where must a lease be recognised, on the company accounts?
Under note number 6.
What do you understand by the accruals concept?
Accrual accounting is one of two accounting methods; the other is cash accounting. Accrual accounting measures a company’s performance and position by recognising economic events regardless of when cash transactions occur, whereas cash accounting only records transactions when payment occurs.
What do you understand by depreciation?
Depreciation is the systematic reduction in the recorded cost of a fixed asset. Examples of fixed assets that can be depreciated are furniture and IT equipment.
What are the main types of ratio analysis used to assess a company’s financial strength?
- Liquidity – the ability of the company to pay its way (solvency). More companies fail due to cash flow than any other reason.
- Current Ratio = Liquid assets / Liabilities.
- Quick ratio = quick assets/ current liabilities
What is profitability, how is it measured and why is it important?
Gross profit margin or net profit margin
Return on assets
Return on equity – i.e. shareholders dividends
What is liquidity, how is it measured and why is it important?
Current ratio = liquid assets/ liabilities
What is working capital, and why is it important? [be able to define WC]
On one hand, WC is important to because it is a measure of a company’s ability to pay off short-term expenses or debts. On the other hand, too much working capital means that some assets are not being invested for the long-term, so they are not being put to good use in helping the company grow as much as possible.
How do you establish the financial standing of a company?
Shareholders’ funds/ net assets shows how much value is in the business
Dun and Bradshaw
Experian
What publicly-available information is there on a company’s financials?
Government website companies house shows the balance sheet and P&L
What information must a small company report under the Small Companies’ Regime? (s.15-16 Companies Act 2006)
This report has to be prepared in accordance with the special provisions relating to small companies within Part 15 of the Companies Act 2006.
A small company counts as anything that turns over less than £6.5m with less than £3.26m net assets, 50 employees. Larger than this the accounts have to be audited.
What is creditors days?
The average amount of time it takes for your firm to pay suppliers
